Late 19th-century finance: First financial globalization?

Political economy of finance in Europe: Week 1

Benjamin Braun

What is global finance?

Agenda

  1. What is global finance?

  2. Two periods of European colonialism

  3. Old colonialism

  4. New imperialism

  5. Sovereign debt in the 19th century

  6. What is global finance, really?

  7. Outlook

What is global finance?

The economics textbook view

“A vast expansion in world trade had brought all manner of new goods into international commerce … The New World’s abundant land, embodied in its agricultural exports, flooded into Europe, and European manufactures were traded back in exchange. … peripheral trading nations lined up to provide the necessary nitrates, bauxite, rubber, coal, and oil. In labor markets too, there was a freedom simply unimaginable today. … Labor, whether skilled or unskilled, could, in principle, wander around the world seeking out the best returns or the most desirable location, unhindered by quotas, immigration inspectors, and the like.” (Obstfeld and Taylor 2005)

What is global finance?

The economics textbook view

“The first phase lasted from 1870 to the First World War. During this time, rich countries constantly exported between 1–2% of their aggregate GDP to the rest of the world. Over time, it added up to a significant resource transfer from rich to poor. … In the capital market before 1914, the world’s poor were indeed the world’s borrowers and the rich countries the world’s bankers.” (Schularick 2016)

Figure 1: Net capital flows from rich to poor economies relative to GDP, 1875–2010

Two periods of European colonialism

Agenda

  1. What is global finance?

  2. Two periods of European colonialism

  3. Old colonialism

  4. New imperialism

  5. Sovereign debt in the 19th century

  6. What is global finance, really?

  7. Outlook

First period of European colonialism

1500 – early 19th century: Military, expeditionary colonialism, based on conquest and slavery

Main function of finance: Financing of “trading” expeditions and other colonial enterprises

Old colonialism

Agenda

  1. What is global finance?

  2. Two periods of European colonialism

  3. Old colonialism

  4. New imperialism

  5. Sovereign debt in the 19th century

  6. What is global finance, really?

  7. Outlook

Old colonialism: The Dutch empire

  • Vereenigde Oostindische Compagnie, founded in 1602
  • ‘Business model’: War, slavery, and trade, mainly in Asia
  • Nationalised in 1796; dissolved 1799
  • All assets taken over by the government; VOC territories became government colonies

Olfert Dapper, East India House, 1663. Amsterdam City Archives. Source: (Petram 2014).

Old colonialism: The Dutch empire

  • Problem: Financing long-distance, expensive, high-risk ventures
  • Solution: ?

Bruijn, Gaastra, and Schöffer (1987); reproduced in (Gelderblom, De Jong, and Jonker 2013).

Old colonialism: The Dutch empire

  • Amsterdam Bourse: Established 1602; world’s first stock exchange
  • Place to trade VOC stock
  • Initial number of VOC shareholders: 1000
  • VOC shares amounted to a “financial revolution”, offering investors “prospects of speculative gains without serious loss of liquidity” (Gelderblom and Jonker 2004, 641)

Hendrick de Keyser Exchange, etching by C.J. Visscher (1612). Stadsarchief Amsterdam. Source: Wikipedia.

Old colonialism: British empire

  • Similar story for the British East India Company (EIC)
  • Profits based on large-scale violence:
    • From 1750s: war-making for territorial conquest as the EIC’s primary activity
    • Over its life course, military expenditure accounted for 75% of the EIC’s expenses (Nogues-Marco 2021, 187).

East India House, Leadenhall Street, London. Built 1726–9.

New imperialism

Agenda

  1. What is global finance?

  2. Two periods of European colonialism

  3. Old colonialism

  4. New imperialism

  5. Sovereign debt in the 19th century

  6. What is global finance, really?

  7. Outlook

Second period of European colonialism

1500 – early 19th century: Military, expeditionary colonialism, based on conquest and slavery

Main function of finance: Financing of “trading” expeditions and other colonial enterprises

Early 19th century – 1960: Still very violent, but European rule territorilized and economic relations institutionalized

Main function of finance: Investment of metropolitan wealth in shares and bonds issued by governments and companies in the periphery

British empire: Foreign & Colonial

  • Financial innovation: Fund shares issued by the Foreign and Colonial Investment Trust (1868), the world’s oldest surviving closed-end (mutual) fund
  • Purpose: cheap access to securities from a wider range of countries for the ‘investing public’

F&C today

Finance & imperialism: The Hobson view

  • A “New Liberal”, Hobson opposed classical, laissez-faire liberalism
  • His antisemitism, while common at the time, tinges his analysis (Cain 2002)
  • His critique of British imperialism became canonical: Capitalists in the metropole accumulated excess profits above and beyond what they could re-invest profitably at home; their consequent search for investment opportunities abroad fueled imperial expansion and exploitation:

“the endeavor of the great controllers of industry to broaden the channel for the flow of their surplus wealth by seeking foreign markets and foreign investments to take off the goods and capital they cannot sell or use at home” (Hobson 2011)

  • Shared by Marxist theorists of imperialism: Lenin & Rosa Luxemburg

J. A. Hobson

Testing Hobson-Lenin-Luxemburg

Hauner, Milanovic, and Naidu (2017) set out to test the Hobson-Lenin-Luxemburg thesis using historical data on investment returns. Results:

“The rich tended to invest overwhelmingly in foreign assets because they were, adjusted for risk, more profitable than available domestic opportunities.”

“To protect such foreign assets, whether portfolio or direct, the countries, partially at the instigation of investors in foreign assets, increased military investments.”

Real return rate spread between foreign and domestic bonds

Real return rate spread between French foreign securities and French domestic bonds

Sovereign debt in the 19th century

Agenda

  1. What is global finance?

  2. Two periods of European colonialism

  3. Old colonialism

  4. New imperialism

  5. Sovereign debt in the 19th century

  6. What is global finance, really?

  7. Outlook

Fiscal policy: Maker of states

Fiscal shocks and state building (Queralt 2022)

‘Pawned states:’ Puzzle

  • Sovereign borrowers in the Global South or periphery had weak ‘fundamentals’ and regularly defaulted on their foreign debt
  • And yet, they had access to relatively cheap external credit

Nominal interest rates excluding British dependencies (Queralt 2022, 81)

‘Pawned states:’ Explanation

“Extreme conditionality”

“the hypothecation of local assets (e.g., state monopolies, railroads, and customs houses) for fresh foreign loans” (Queralt 2022, 3)

Fiscal policy: Unmaker of states

What is global finance, really?

Agenda

  1. What is global finance?

  2. Two periods of European colonialism

  3. Old colonialism

  4. New imperialism

  5. Sovereign debt in the 19th century

  6. What is global finance, really?

  7. Outlook

What is global finance, really?

  • Based on ‘poor’ countries’ negative current account balance—see Figure 1—during the 1870-1914 period, economists speak of “a significant resource transfer from rich to poor” (Schularick 2016).

  • However, this interpretation ignores financial transfers from poor to rich (in balance of payments terminology: ‘primary income’; more in week 3)

“a fact that may not be sufficiently well known, although it is well attested by trade statistics from the era and was well known to contemporaries. In the period 1880–1914, the United Kingdom and France earned so much from their investments in the rest of the world (roughly 5 percent additional national income for France and more than 8 percent for the United Kingdom) that they could allow themselves to run persistent structural trade deficits (an average of 1–2 percent of national income for both countries) while continuing to accumulate claims on the rest of the world at an accelerated pace.” (Piketty 2020, 283)

What is global finance, really?

“In other words, the rest of the world labored to increase the consumption and standard of living of the colonial powers, even as it became increasingly indebted to those powers.” (Piketty 2020, 283)

Net foreign assets of imperial powers

What is global finance, really?

The political economy view

  • Creating, trading, and enforcing financial claims

  • … by specific actors: states, firms, individuals

  • … connected via relationships of hierarchy and power

  • We study these relationships through the lens of

    • assets and liabilities
    • stocks and flows
    • in short: balance sheets and financial data

Outlook

Agenda

  1. What is global finance?

  2. Two periods of European colonialism

  3. Old colonialism

  4. New imperialism

  5. Sovereign debt in the 19th century

  6. What is global finance, really?

  7. Outlook

Outlook

  • Financial globalization returned in a post-colonial world (week 2)
  • Actor A’s asset is is actor B’s liability (week 3)
  • Shares are still issued by limited-liability corporations and fund shares are still issued by mutual funds (week 4)
  • Sovereign debt still makes and unmakes states (week 5)
  • Enforcement of private claims against sovereign debtors remains a battle ground (week 7)

Bibliography

Cain, Peter J. 2002. Hobson and Imperialism: Radicalism, New Liberalism, and Finance 1887-1938. Oxford University Press.
Gelderblom, Oscar, Abe De Jong, and Joost Jonker. 2013. “The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 16021623.” The Journal of Economic History 73 (4): 1050–76.
Gelderblom, Oscar, and Joost Jonker. 2004. “Completing a Financial Revolution: The Finance of the Dutch East India Trade and the Rise of the Amsterdam Capital Market, 15951612.” The Journal of Economic History 64 (3): 641–72. https://doi.org/10.1017/s002205070400292x.
Hauner, Thomas, Branko Milanovic, and Suresh Naidu. 2017. “Inequality, Foreign Investment, and Imperialism.”
Hobson, John A. 2011. Imperialism: A Study. Cambridge: Cambridge University Press.
Nogues-Marco, Pilar. 2021. “Measuring Colonial Extraction: The East India Company’s Rule and the Drain of Wealth (17571858).” Capitalism: A Journal of History and Economics 2 (1): 154–95.
Obstfeld, Maurice, and Alan M. Taylor. 2005. Global Capital Markets: Integration, Crisis, and Growth. Cambridge University Press.
Petram, Lodewijk. 2014. The Worlds First Stock Exchange. Columbia University Press.
Piketty, Thomas. 2020. Capital and Ideology. Harvard University Press.
Queralt, Didac. 2022. Pawned States: State Building in the Era of International Finance. Princeton University Press. https://www.degruyter.com/document/doi/10.1515/9780691231518/html.
Schularick, Moritz. 2016. “International Capital Flows.” In. Oxford University Press. https://academic.oup.com/edited-volume/28353/chapter/215210051.